One of the most difficult parts of my role as a financial adviser is helping potential investors to understand risk. Every adviser has a method of testing a client’s attitude to risk. This is usually done by means of a questionnaire. The questionnaire then analyses the results into sectors of high, medium and low, with grey shading between each gatepost. The results help, but there are other indicators we should take into account.
For example, when I meet a potential client I watch their body language. I also look at their clothing: is it conservative, colourful, eye-catching? And, importantly, I listen to how they describe their family and their lives. For compliance purposes I will, of course, be guided by the results of the risk analysis. However, I will continue to gather hints about the client as we work together. If someone has recorded a cautious attitude to risk, this seldom changes. Sometimes, though, a new client will display a gung-ho approach to investment. Experience will often show this is not actually true, because the client has not understood risk.
The use of the risk analysis allows us, as the adviser, to have an idea about the level of risk the client wishes to take. It also helps us to construct an appropriate portfolio. What it does not do is educate the client to understand risk. It also does not build tolerance to economic and political change. You can show people charts, but some will not understand them. They may be too polite to tell you. Others will view them with the attitude: such-and-such an economic situation will never happen to me.
Many say we are in an unprecedented geopolitical and economic situation at the present time. But is that true? I was interested to listen to a programme recently on Radio 4. The introducer discussed the economic conditions which Chaucer lived through. There were high interest rates and high inflation. There was the Black Death. There was a reduction in the population, resulting in a shortage of labour. That allowed those still able to work to ask for higher wages, which led to the Peasants’ Revolt. Then there was the Hundred Years’ War. These economic and political cycles constantly repeat themselves. The detail may be slightly different, but the risks and results are frequently very similar.
There is no magic answer except this: spread your money between a number of assets. Property, cash, and stocks and shares. But the percentage in each asset class is vital. Keep a regular eye on performance, and change the allocations when needed. You may need help with this unless you have a lot of time to devote to it.
Is there an answer? I think so. There are a few basic points. If we have worked hard to gain wealth – even small amounts – we need to invest it. At the very least, we need to maintain its purchasing power. Accept that there will be good and bad phases, but stick with it. The biggest risk is withdrawing your money. Statistics show you never manage to get back into the markets at the right time. Be well dispersed, and seek advice from people who spend their lives doing this. You deserve advice from a professional. Keep a watchful eye, and if you do not have time to do that, employ someone to work with who can devote ample time to this important task.